The wine world's new bogeyman

Jon Bonné

Published 4:00 am, Sunday, May 30, 2010

Meet the wine industry's new bogeyman. It goes by the name of HR5034.

The House bill, introduced in April and backed by beer and liquor wholesalers, affirms states' rights to regulate alcohol, per the 21st Amendment. But, subtly, it does more. It would all but exempt states from federal oversight in these matters.

In other words, it stands to roll back freedoms gained by wine lovers in the wake of Granholm vs. Heald, the 2005 Supreme Court ruling that now allows wine to be shipped direct in 37 states and the District of Columbia. In its own words, HR5034 would let states discriminate against wineries as long as it isn't "without justification," a stance similar to what the high court found unconstitutional five years ago.

What would make wholesalers scramble to make this their top legislative priority?

As the wholesalers see it, the 2005 Granholm case was just the tip of the iceberg. There was a lengthy and tangled fight between Costco and the state of Washington to let the big-box retailer become, in effect, its own distributor. (It won, then lost.) There was a Massachusetts law limiting out-of-state wine shipments that was nixed in January by an appeals court. And what probably sparked this activity stems from March, when Anheuser-Busch InBev sued an Illinois regulator, claiming discrimination after the world's largest brewer was blocked from buying a full share in a local beer distributor because it wasn't an in-state company.

Rarely has the liquor industry so quickly taken up arms on an issue. And it has created unusual bedfellows. Wineries big and small - including the Wine Institute, the California industry's lobbying arm - have attacked the bill with venom. But they find themselves allied with the nation's liquor distillers, including bourbon producers who fear that HR5034, among other things, would allow states to toss out federal codes that define how spirits are made. (Something similar to this is why certain localities have low-proof beer.)

It is telling that alcohol producers and the people who get their products onto shelves suddenly find themselves lacing up their gloves. What's up? Sore wounds being licked, for one. There was no way Granholm, to say nothing of the subsequent cases, would settle the liquor industry's issues for good.

But HR5034's backers see something more afoot. They see this parade of court cases as a shadow charge for deregulating liquor.

Craig Wolf, president and CEO of the Wine & Spirits Wholesalers of America, the distributors' main trade group, suggested to me that his real priority is to make sure direct shipping - a step toward deregulation, as wholesalers see it - remains the task of state legislators alone.

"You just want the courts out of it?" I ask him.

"Yes. Exactly."

Deregulation is a wholesaler's nightmare. This middle tier of the three-tier system has long been propped up by a system of state laws that preserve a business model with serious competitive flaws. (Ironically, wholesalers are trying to preserve this complicated system at the same time their own industry has undergone huge streamlining.) Start poking holes in the three tiers - exactly as these court cases were designed to do - and you begin to see why HR5034 is their greatest hope.

Without fail, wholesalers fall back on the fact that we're talking about alcohol, which is regulated differently than any other product. They sometimes dangle the specter of underage drinking, as they did when direct shipping was about Internet sales.

But as wine industry legal experts tell it, HR5034 amounts to an unprecedented cap on federal powers. Tracy Genesen, a partner at Kirkland & Ellis who represents the wine industry, argues the new law could provide wholesalers with a near-blanket antitrust exemption. (Only baseball owners have gotten something similar.) Wendell Lee, general counsel for the Wine Institute, noted that a decade ago wholesalers backed the 21st Amendment Enforcement Act, which let state prosecutors use federal courts to attack interstate liquor shipments. Now they want to keep those issues out of federal court.

"What they're asking for is a free pass," he says.

We may still be talking liquor - the grand asterisk of American public policy - but the heated tempers over HR5034 have revealed a more dramatic concern, one that the industry would rather not discuss: Our current model for selling booze in America is a mess. It is filled with anti-competitive regulations and state semi-monopolies that often create higher prices and build inefficiencies into an already inefficient system. It is the antithesis of free trade.

Why would Costco or Anheuser-Busch sue to change the rules of the road? Because, like any good business, they want efficiencies. That seems to strike terror into the wholesaler's heart.

We have a terrific model to see what happens when you loosen the three-tier reins. It's California. Our distribution laws, arguably the nation's most liberal, allow wineries to be their own distributors. Yet California's wine wholesalers are thriving. Why? Because they offer wineries economies of scale.

States' rights were preserved after Prohibition because, at the time, parts of America truly demanded to stay dry. The world has changed. Now municipalities are debating whether to tax marijuana to boost revenue. Longtime control states like Washington are weighing whether to get out of the liquor business entirely.

So why are we arguing about whether it should be a felony to have FedEx bring you a bottle of Chardonnay?

HR5034 seems like a long shot, but don't discount beer wholesalers' clout on Capitol Hill. They have given almost $21.5 million to federal candidates since 1990, according to Opensecrets.org - more than the National Rifle Association.

Still, it signals we've got a long fight ahead to figure out how to properly regulate alcohol. And the current situation seems to clash with Wolf's own words to me: "The last thing we or anybody else wants to do is have an industry that's battling each other."

In theory, that would mean stopping the court fights, and finding more productive solutions than HR5034. Ultimately it means we abandon our rusted-out post-Prohibition infrastructure of selling liquor in America. And we find a way to make peace with how we buy what we drink.

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